Japanese PM Abe faces economic challenges

Beijing(China)—Although Shinzo Abe has inherited a strong economic legacy from Junichiro Koizumi, there are still economic problems for him to address as Prime Minister of Japan.
The Japanese economy finally pulled itself out of a ten-year economic depression in the second half of 2002 and has achieved positive growth for four consecutive years. The growth rate was much higher than the 1.5 percent predicted growth rate. Japan’s stock market and real estate prices are steadily growing. The country has almost finished cleaning away non-performing assets and eliminated deflation. Enterprises report significant improvement in efficiency. The pressure of unemployment has been reduced. Enterprise investment and consumer demands are increasingly important in gradual economic recovery, slowly taking the place financial investment and foreign business as the driving forces of economic growth. Shinzo Abe stated clearly that he would follow through Koizumi’s reforms. However, the road ahead will not always be smooth.
The first challenge is consumption tax. Although all the main economic indicators are moving in the right direction, Japan has not made any substantial progress in its fiscal reforms. At the end of 2005, the long-term debt of central and local governments totaled 774 trillion yen, 150 percent of the GDP. The ratio of budget deficit in the GDP is 6.4 percent. These two indicators are well past the international alert line.
Japan is simply unable to make ends meet. For example, its tax revenue in 2005 was 44 trillion yen, but its financial expenditure was 82 trillion yen. To close the gap, Japan had to issue more state bonds. As a result, the government has to spend 21 percent of its fiscal budget every year paying back the bonds. The financial structure is increasingly rigid. It is almost impossible for the government to bring macro-controls into play by fiscal means.
It is the Japanese people who will ultimately pay the heavy debt. They will come to expect continual tax increases and feel increasingly insecure financially. This will directly affect consumption, thereby containing macroeconomic development. Although raising consumption tax is an important way to reduce taxes in the long term, it is also the easiest way to offend voters. Former Japanese Prime Minister Noboru Takeshita fell out of favor for exactly this reason ¨C he imposed an additional consumption tax. Former Prime Minister Ryutaro Hashimoto made the same mistake, raising consumption tax from 3 percent to 5 percent. Koizumi dared not do the same, so these economic problems have inadvertently been bequeathed to Abe. The Abe government undoubtedly understands that straightening out financial problems is almost impossible without raising taxes, but that by raising taxes they would be taking a big political risk.

—The Daily Mail-China Daily news exchange item